FINAL_AFHU_News_11.4.20

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PAGE 34 Predictable Income in Difficult Times Neal Myerberg Planned Giving Expert The Low Interest Rate Environment Interest rates for savings, money market, and checking accounts are nearly zero. Rates for short term CDs are similarly low. Recent rates for Treasury instruments range from 0.10 % to 0.14 % for T-bills that mature from four weeks to 52 weeks. In addition, the IRS discount rate is at a historic low (0.4 % for September and October). This affects a variety of calculations including rates for charitable gift annuities. It particularly impacts rates for individuals under age 70. With interest rates this low, it may not be prudent for individuals to seek alternative income producing investments in order to generate more return if risk is, as it should be, a significant factor in making investment decisions – particularly for older individuals and retirees. Fed Chair Powell stated in August, and reiterated it again more recently, that the central bank will not feel obliged to raise interest rates even in a fullemployment economy. While raising rates has been a way historically to deal with inflation, Powell’s statement suggests a present change in philosophy. Additionally, Goldman Sachs has recently issued its prediction that the Fed will not raise interest rates until 2025. How Can a Charitable Investment Help with Income Needs? A charitable gift annuity (CGA) is a contract between you and American Friends of the Hebrew University (AFHU) which sets out fixed payments for one or two lives. CGAs are regulated by the New York State Department of Financial Services. Fixed lifetime rates for CGAs have historically been higher than prevailing interest rates. CGA rates are based on life expectancy data and are filed and approved by New York and other state regulators. CGA rates are set out in tables based upon the age of the annuitant to the nearest birthday. In addition to the fixed lifetime rate (through one or two lives), a contribution to establish a CGA entitles the donor to an income tax charitable deduction. At the outset, the gift annuity calculation includes the determination of how the annual annuity amount will be taxed. For gifts of cash, the recipient of the annuity will pay tax at rates for ordinary income for a portion of the annuity and receive the balance of the annuity amount tax-free. Because the IRS discount is at a historic low, the percentage of the annual CGA payments that are received tax-free is at a historic high. Beginning at age 70, the tax-free portion will be at least 85% of the annual annuity amount. The older the annuitant when the CGA is established, the larger the tax-free portion. Factoring in the taxable equivalent for tax-free income and adding that to the annual payment amount suggests that the rate of return from a CGA is substantially higher than the already generous fixed lifetime rate.
AMERICAN FRIENDS OF THE HEBREW UNIVERSITY AFHU NEWS VOL. 25 PAGE 35 How are the Details of a Charitable Life Income Plan Determined? Whether the appropriate vehicle is a CGA or a charitable remainder trust (CRT) is best determined by a review of the goal to be achieved. If the goal is to increase returns on cash investment to a level that will provide predictable income through years of retirement, a CGA may be the best choice. Providing the charity with date/dates of birth is the first step in obtaining an accurate calculation. The calculation will provide you with the fixed lifetime rate, the amount of the charitable deduction, and the portion of your annual annuity that will be paid to you tax-free. You can request and complete a Request for Information here. You may also contact AFHU directly to obtain the table of CGA rates and visit the planned giving section of the AFHU website here. A CRT may either be established to provide for fixed payments for life/lives or for adjustable payments at a fixed rate based upon the revaluation of the CRT at the end of each calendar year. For information about the tax benefits of a CRT, you may contact AFHU directly or first visit the planned giving section of the AFHU website here. For more information about charitable life income plan investments and to learn how to become a member of AFHU’s Einstein Visionaries Society, please contact Veronica Holquin at 212.607.8576 or vholquin@afhu.org. If your planning may involve the use of appreciated capital gain property (e.g., stocks; mutual fund shares; works of art and other collectibles; investment real estate; secondary/vacation residences), a type of CRT may be the best choice. A contribution of capital gain property to a CRT enables you to avoid tax on the long-term capital gain at the time of contribution. Like a CGA, the rate for a CRT is fixed – but it is not based upon a table of rates. A customized calculation is required for a CRT to determine what rate may be set to enable the CRT to pass one or more IRS tests to qualify for tax-exemption. The rate for a CRT can never be lower than 5%.
Page 1 and 2: AFHU NEWS Vol. 25 / Fall 2020 KNOWL
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FINAL_AFHU_News_11.4.20

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